Navigant Research Blog

Climate Plan Promises Brighter Future for U.S. CHP Market

Mackinnon Lawrence — June 28, 2013

President Obama’s climate change speech this past week signaled a revamped effort by the Administration to tackle emissions from industrial facilities. To date, the effort by the Environmental Protection Agency (EPA) to set regulations targeting boiler emissions from new coal plants and industrial facilities has carried the Administration’s climate change torch. But the President’s speech signaled a willingness to use broad executive authority to clamp down on existing facilities, expanding opportunities for a combined heat and power (CHP) industry that has seen a sharp drop off in new growth from its PURPA heyday.

Achieving greater levels of efficiency by simultaneously generating electricity and useful heat, CHP allows facility owners to reduce their fuel expenses while also cutting emissions. According to the U.S. CHP database, maintained by ICF International on behalf of Oak Ridge National Lab (ORNL) and the Department of Energy (DOE), 82 gigawatts (GW) of CHP capacity was installed across the country by mid-2011. Industrial facilities represented 88% of total capacity, with refineries processing petroleum and manufacturing chemicals accounting for nearly 40 GW.

Although hosting a relatively broad base of CHP deployments across a number of applications, the U.S. CHP industry has room to run as measured against leading markets like Denmark, the Netherlands, and Finland. Installed CHP capacity accounts for around 30% of total generation capacity in these countries; CHP represents just 8% of generation capacity in the U.S.

Drumbeat Continues

Presaging Obama’s double-down on climate change, a drumbeat of executive orders and state-level commitments over the past 12 months has renewed interest in exploiting CHP opportunities across the U.S.

In August 2012 Obama issued an executive order that called for 40 GW of new CHP capacity to be deployed in the industrial sector. Although non-binding, the effort seeks to stimulate $40-$50 billion in new capital investment. A corollary executive order directs federal facilities to use CHP when life-cycle cost analysis indicates energy-reduction goals will be met. Meanwhile, a surge in natural gas production, along with the stabilizing of Henry Hub prices – a useful proxy for tracking national movements in the price of NG – is expanding the field of potential viable projects.

Texas-Sized

In the oil- and gas-rich state of Texas, the CHP industry has thrived despite low electricity rates and narrow spark spreads (the difference between the delivered electricity price and the total cost to generate CHP, and a widely used measure of CHP viability). The state accounts for 17 GW of installed CHP capacity, or 21% of total U.S. capacity. In Texas, home to 5% of the world’s refining capacity – facilities that produce commodity products and have high around-the-clock thermal load demand – efficiency plays a key role in driving profitability.

Recent bills signed into law by Texas Governor Rick Perry supporting CHP technology dovetail with the Obama Administration’s broader climate change agenda. The bill removes regulatory barriers and improves the business climate for cogeneration facilities in Texas.

For the U.S. as a whole, the transition away from coal-based power generation is opening up opportunities for technologies like CHP to expand power generation capacity while reducing demand-side pressure on the grid. After annual capacity growth declined 92%, from an average 2,700 MW from 2000 to 2004 to 207 MW a year from 2005 to 2010, the CHP market appears to be responding to positive signals.